Small Businesses Increasingly Turn To Small Banks For Loans: Report

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SMALL BUSINESS LOANS
James Oh, owner of Tom Liquor store located at the intersection of Florence and Normandy Avenues in South Los Angeles, waits on a customer on April 27, 2012 in Los Angeles, California. Small businesses continue to have more success finding loans at small lenders than at big banks, according to new research. | Getty Images

Small banks continue to beat out their bigger counterparts when it comes to small business lending, according to credit marketplace Biz2Credit's June Small Business Lending Index.

The latest analysis of 1,000 small business loan applications on Biz2credit.com found that approvals last month by big banks rose half a percentage point from May to 11.1 percent, while small bank approvals jumped two percentage points to 47.5 percent.

"Small banks are the big story this month," said Biz2Credit CEO Rohit Arora in a statement. "They have made a lot of SBA 7(a) express loans, which used to be the strength of the largest banks." SBA loans are backed by the U.S. government in the event of a default, reducing the risk to lenders.

The increasing role of small banks in the small business loan market is good news for Main Street, according to Scott Shane, a professor of entrepreneurial studies at Case Western Reserve University. That's because small lenders are typically a better fit for small businesses, especially in the aftermath of an economic downturn, Shane argued in a recent BusinessWeek article.

For one, small banks generally pay more attention to small businesses, given that the size of small business loans account for a much larger share of their total assets than those of big banks, Shane wrote.

In addition, "small lenders are less likely than their bigger counterparts to focus solely on credit scores and financial statements during the evaluation process, and more likely to rely on small business owners' character and relationships," wrote Shane, citing a 2004 Journal of Financial and Quantitative Analysis study.

In June 2011, when many small businesses were still repairing finances battered by the recession, Biz2Credit said big banks approved only 8.9 percent of small business loan applications through the site, while small banks approved 45.5 percent.

Despite small lenders stepping in, cash flow issues continue to plague Main Street. In a recent study by the National Small Business Association, nearly half of business owners reported they needed funds at one point in the last four years, but were unable to find any willing sources.

On a more positive note, 19 percent of the business owners surveyed by the NSBA said they are more likely to seek investors as a result of the crowdfunding provision included in the recently-passed JOBS Act that allows entrepreneurs to raise money from investors online in exchange for equity in their companies.

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Small Business Loans | SBA.gov